HCA Settlement in Shareholder Class Action Suit Over Failure to Disclose False Claims Act Cases Will Cost the Company Another $215 Million

Friday, November 13, 2015

By George F. Indest III, J.D., M.P.A., LL.M., Board Certified by The Florida Bar in Health Law

Just days after settling with the U.S. Department of Justice (DOJ) agreeing to pay $16 million to resolve allegations of False Claims Act (FCA) violations, HCA Holdings, Inc. (HCA), a notable Tennessee-based health care company, announced yet another settlement, this time with its shareholders. HCA reached a $215 million settlement on Wednesday, November 4, 2015, to conclude a class action suit brought on by its shareholders for failure to disclose information regarding the pursuit of an internal investigation following the FCA case.

HCA also agreed to settle two state court cases stemming from the same initial public offering (IPO) to investors that did not account for the company's withholding of pertinent information regarding its investigation into allegations of medically unnecessary (but highly profitable) cardiac procedures. As a result of the two state cases and the class action suit, HCA will also be shelling out a reported additional $120 million in legal costs.

To read our previous blog on the FCA case against HCA among many other leading health care chains, click here.

HCA's 2011 Prospectus for the IPO Falls Short of Promise.

In connection with HCA's IPO, which took place on March 9, 2011, the company issued a Registration Statement and Prospectus describing the financial security of the corporation for prospective buyers. Despite the company's hefty debts, the offering surpassed records set prior to it by companies including Nielsen Holdings NV and Kinder Morgan, Inc. The IPO resulted in sales of 126.2 million shares and raised a total of $3.79 billion (more than the $3.53 billion expected). However, no mention of an internal investigation for alleged FCA violations was made in the issued Registration Statement and Prospectus.

To read more information about the IPO as reported by The Washington Post, click here.

It didn't take long though for investors who purchased shares from HCA's IPO at $30 a share to catch onto the health care company's deception by way of its rapid market decline. Following the second quarter's end on July 25, 2011, HCA announced its new (more dismal) outlook for 2011 growth-adjusted earnings falling from a prior middle-single-digit growth target to a range of three to five percent (a 60 percent decline in just a matter of months).

A media article released on October 1, 2011, purposed to raise conjecture as to HCA's accounting practices and the alleged disappearance of an approximate $15 billion from private-equity funds used to take HCA private. To read the full article, click here.

By October 3, 2011, HCA's stock pricing declined significantly per share to close at a mere $18.81.

Shareholders Looking for Retribution.

The class action suit against HCA, its directors, its controlling shareholder and the investment bank underwriters of its 2011 IPO, was certified in September 2014. The complaint alleged that defendants violated the Federal Securities Laws by providing false and misleading information in the company's Registration Statement and Prospectus filed in connection with the March 2011 IPO. Plaintiffs consisting of shareholders reportedly swindled by HCA in making their purchases of shares, sought remedies under the Securities Act of 1933 (1933 Act).

The facts alleged to be truthful and said to be omitted from the IPO Registration Statement include:

(1) "The Company improperly accounted for its prior business combinations in violation of GAAP, causing its financial results to be materially misstated;

(2) The Company had failed to maintain effective internal controls concerning its accounting for business combination; and

(3) The Company failed to disclose known trends and uncertainties as required by SEC regulations concerning its revenue growth rate. HCA's revenue had been steadily growing for the past five years. Nonetheless, given that the Company would be unable to maintain its growth, the Company's past results provided investors with a distorted picture of the Company's potential growth and were not indicative of future operations." (Complaint for Violation of the Federal Securities Laws 12: ¶ 51, Oct. 28, 2011).

The suit further alleges that HCA's own internal investigation revealed information about the "routine" performance of heart procedures on patients without significant heart disease. Plaintiffs maintain that these pertinent formerly nondisclosed facts are what led to HCA's market decline. According to court filings, it was not until after the IPO that those who had already invested were made aware of HCA's true financial security (or lack thereof) and corporate standing.

To read the full complaint filed in the Middle District of Tennessee, click here.

About the Author: George F. Indest III, J.D., M.P.A., LL.M., is Board Certified by The Florida Bar in Health Law. He is the President and Managing Partner of The Health Law Firm, which has a national practice. Its main office is in the Orlando, Florida area. www.TheHealthLawFirm.com The Health Law Firm, 1101 Douglas Ave., Altamonte Springs, FL 32714, Phone: (407) 331-6620.

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